Factoring & Forfaiting

Factoring
• Factoring involves the outright sale of receivables
at a discount to a factor to obtain funds.
• It an arrangement between factor and his client,
which include at least two of the following
services to be provided by the factor
– Finance
– Maintenance of Accounts
– Collection of Debts
– Protection against Credit Risk
 Definition
• Factoring can be broadly defined, “as an
agreement in which receivables arising out of
sale of goods/ services are sold by the firm
(client) to the factor (a financial intermediary )
as a result of which the title to the goods &
services represented by the said receivables
passes on to the factor.
 Parties of the agreement
• The buyer
• The seller
• The factor
 Functions of a Factor
• Maintenance / Administration of sales ledger
• Collection of accounts receivables
• Financing trade debts
• Assumption of credit risk/ credit control and
credit protection
• Provision of advisory services
 Contd.

Factor

Buyer

Seller
 Cost of Service
• Commission: The charges for collection and
sales ledger administration is in the form of a
commission expressed as a percent of the
value of debt purchased.
• Discount: It is the interest charge for short
term financing by the factor between the date
of advance payment and the date of collection
payment date.
 Types of Factoring
• Recourse Factoring Vs. Non Recourses
Factoring
• Advance Vs. Maturity Factoring
• Full Factoring
• Disclosed Vs. Undisclosed Factoring
• Domestic Vs. International Factoring
 Recourse Factoring Vs. Non Recourses Factoring:

Recourse

●
It is the basis on which receivables are sold to the factor with the understanding that
all credit risks would be borne by the firm.

. Non Recourse

●
It is the basis on which receivables are sold to the factor with the understanding that
all credit risks are on the purchased accounts (factor)
 Advance Vs. Maturity Factoring

Advance

●
The factor pays a pre-specified portion, ranging between three fourth to nine-tenths of factored
receivables in advance, the balance being paid upon collection/ on the guaranteed payment
date.

Maturity

●
It is an arrangement under which the factor does not make a prepayment to the
client.
 Full Factoring
• It provides the entire spectrum of services
namely, collection, credit protection, sales
ledger administration and short term finance.
 Disclosed Vs. Undisclosed Factoring

Disclosed

●
The name of the factor is disclosed in the invoice by the supplier – manufacturer
of the goods asking the buyer to make payment to the factor.

Undisclosed

●
The name of the factor is not disclosed in the invoice, although the factor
maintains the sales ledger of the supplier –manufacturer.
 Domestic Vs. International Factoring

Domestic

●
It is the factoring in which the buyer, seller- supplier and factor are domiciled in the
same country.

International

●
Usually it includes four parties to a cross border factoring transaction.
●
They are exporter (Client), Importer (Customer), export factor and import factor
 Factoring firms in India
SBI Factors and commercial services Pvt. limited

Global Trade Finance (P) Ltd

Foremost factors limited

HSBC Factoring 

Can Factors Ltd.

ECGC

CITI Bank
 Forfaiting
• It is a form of financing of receivables
pertaining to international trade.
• It denotes the purchase of trade bills/
promissory notes by a bank/ financial
institutions without recourse to the seller.
• The purchase is in the form of discounting the
document covering the entire risk of
nonpayment in collection.
• All risks and collection problems are fully
responsibility of the purchaser (Forfaiter), who
pays cash to seller after discounting the
bills/notes.
• The forfeiter may hold these notes/bills till
maturity for payment by the importer’s bank.
• Alternatively, he can securities them & sell the
short term paper in the secondary market as
high yielding unsecured paper.
 Forfaiting & International factoring
A forfaiter charges a premium for exchange risk A factor does not guard against exchange rate fluctuations

Pure financing arrangements Also includes ledger administration & collection

Finances notes/bills spread over three to five year Essentially a short term financing Internatio
Forfaiting nal
factoring

Depends on the bank guarantee Credit standing of the exporter